I was a bit confused when I read this. TurboTax endorsing bitcoin as a means of legal tax avoidance? Cool

Tax avoidance is legal, tax evasion isn't

So if there isn't a law in your country definitively dealing with bitcoin , there may be, depending on how your legal framework treats these situations, nothing illegal about storing wealth in bitcoin.

Er, this doesn't give much of a reason for how it avoids taxes. The only argument I can discern from the graphic is that it's not taxable because the bitcoins are produced "without the involvement of government or banks".

Um ... yeah. Good luck using that argument with an IRS agent.

(Note: this is separate from the issue of whether you can conceal your transactions from the IRS with bitcoin, keeping the government from ever finding out about this barter/private currency/whatever income. But that's tax evasion, which is illegal. That doesn't mean the TurboTax graphic's argument is remotely plausible if you ever do have to justify why you didn't list it as taxable income.)

I'm not so sure... and I'm also not too savvy on the differences between tax law in the US vs. Canada and Europe. But suppose I'm on vacation in Brazil and I buy an amethyst necklace for 20 USD. Then, a few weeks later, someone discovers the cure for cancer that requires amethyst and suddenly a gramme of it rises in price to several thousand dollars. Technically, it makes me a millionaire, but for tax purposes, at least in Canada, I wouldn't have to declare it till I started selling the amethyst gramme by gramme... and then I'd only have to declare it as income derived from the appreciation of an asset. The necklace itself would still be tax free... if I moved away from Canada, whatever bits of the necklace I still kept would still be tax free, etc.

On a related note, a merchant could probably easily hide all evidence of having received bitcoins, and then record any product dispensed in return for those bitcoins as a "promotional giveaway", deducting the "forgone income" on their taxes. Not recommending it, but I don't know how they'd enforce this if the buyer didn't say anything...

...I operate a mining farm, all expenses are expenses Nice. Recudeds my tax income....all sold BTC are income. Good. I need some - dont wan to run at a loss

...all KEPT btc are inventory - and unless I get really large otherwise, this is not reported, as I report profit/loss, not goods are hand

So, I sell some, to pay and expand, and keep some fo which I dont pay income tax until I sell them and get "real" currencyl.

Real and not currency totally in the definition of the law here

yes. if you keep them they're not taxable, but if you sell them for the currency of your country, they are. turbotax didn't make this even slightly clear with their little infographic.

the real question is how is income from selling them taxed? long- or short-term capital gain? which is why i think the client needs to be able to send specific coins - so those bitcoin which were mined more recently, and have a higher cost of production [for miners], can be exchanged.

if Bitcoin are taxed as hobby income (in the US - a pleasant and peculiar tax designation...), what can be offset?

in any case, it's remarkable to see an entity like turbotax deal with Bitcoin - it'll do us good. i doubt the information they're putting out about it will remain unchanged, however.

On a related note, a merchant could probably easily hide all evidence of having received bitcoins, and then record any product dispensed in return for those bitcoins as a "promotional giveaway", deducting the "forgone income" on their taxes. Not recommending it, but I don't know how they'd enforce this if the buyer didn't say anything...

If I were the IRS I would just wait until he'd encash the BTCs or when he's receiving deliveries with no USD transactions associated to them.

the real question is how is income from selling them taxed? long- or short-term capital gain? which is why i think the client needs to be able to send specific coins - so those bitcoin which were mined more recently, and have a higher cost of production [for miners], can be exchanged.

Nah, for me they are taxes like... well... normal capital gins tax, 19% like all income I have

I have used TaxAct for many years, so I hope you will include some guidance for users of virtual currencies so I can continue to use your product. It seems clear that TurboTax is planning on providing guidance in this area.

Thanks!

Here is the response I got:

Quote

Dear TaxACT® Customer,

TaxACT is not currently planning on supporting this information for the 2011 season. While there are a limited number of tech savvy users that may be utilizing virtual currency, this is not yet a common thing that a large number of customers are using. Virtual currency such as bit coins are still in the infant stage, there is no true standardization, or a large number of users to this point. While I have forwarded this on to the development staff, the requested feature will not be available in 2011 and most likely will need to develop more (and become standardized enough that it is recognized by the IRS or the Securities exchange), this is not something is is likely to be included in your tax return as an investment or other similar transaction. Virtual money is currently very similar to purchasing a gift card or other similar item.

I do recommend that when you are ready to prepare the 2011 return, you contact our TaxPayer support staff to verify that the bit coins are not something to claim on the return.

Thank you for using TaxACT. Please let us know if you have any further questions.

yes. if you keep them they're not taxable, but if you sell them for the currency of your country, they are.

Are you sure? The IRS pages linked above suggest that merely receiving bitcoins would count as barter income and so is taxable at its market exchange rate to dollars

If you're growing say cucumbers in your backyard and pickled them for storage. How would your taxman view that? Logically it seems to me that if you're not selling away your pickles, then there's no tax. But if you start selling them or trading them regularly on significant volumes, then there might be a tax.

The simple answer is, once they realize there is money flowing - they will want their piece of the pie. Of course, that could have unintended consequences of spurring growth into bitcoin in general, since if you don't exchange it at the 'edges' for anything, how do you tax the blockchain?

You don't. Pure bitcoin transactions with no edge currency transfer would fall out of the domain of conventional trade, at least for a while. Perhaps long enough to incubate some serious growth.